The Securities and Exchange Commission has a lot to tackle. Pressure is growing for companies to reduce the environmental impact of their businesses, and to be more transparent about what they’re doing. But what rules should be put in place, and how should they be enforced?
Meanwhile, cryptocurrencies have surged in popularity—but what should be done to protect investors?
To answer those questions, SEC Chairman Gary Gensler spoke with Darren Everson, a Wall Street Journal deputy chief news editor, at the Journal’s CEO Council Summit. Here are edited excerpts of the conversation.
Climate risks
MR. EVERSON: Let’s start with climate-risk disclosure. What’s the latest on timing for a rule proposal?
MR. GENSLER: We’ve got a number of projects that we’ll put out—subject to my fellow commissioners—to public comment, hopefully early next year. One is climate-risk disclosure—the risks that are facing companies today that their shareholders want to know more about. The second is related to the workforce, what we call human-capital management. And third, some disclosure with regard to cyber risk.
MR. EVERSON: Regarding climate-risk disclosures, a few months ago, you directed SEC staff to recommend how companies might disclose Scope 1 emissions, those from a company’s own operations, Scope 2, a company’s energy use, and Scope 3, for other parts of the value chain. Is Scope 3 disclosure looking more or less viable?
MR. GENSLER: We are considering all three, and the reason is that many investors find it relevant to their decisions. We’re a disclosure agency, it’s about investors, it’s about capital formation and trying to provide consistent, comparable, decision-useful information.
And with regard to Scope 3, the value chain, I would note that there are many companies now making commitments to the public, and thus to their shareholders, that they might someday have net zero emissions. That’s up to the companies. If these companies are making such commitments, then we’re considering what disclosures they have to the public around those commitments.
MR. EVERSON: How do you verify what companies are saying? When it comes to Scope 3, some companies have said that there’s some concern about how accurately they can disclose that.
MR. GENSLER: As the old saw says, “You can’t really manage what you’re not measuring,” so what are you measuring? And if a company says, “Well, we made this commitment but we’re not even estimating it,” then therein is an important disclosure in and of itself.
MR. EVERSON: You’re also working on beefing up human-capital disclosures. You said these might include metrics on demographics, workforce turnover, compensation, benefits and other things. Which metrics are most important to you?
MR. GENSLER: I would say all of the ones you just mentioned. When you buy a company, or if you are putting together a sales brochure to sell your company, you would wish to look at certain key metrics. Not just, for instance, “We have 42,000 employees,” and end with some boilerplate. You would say more about that workforce. It’s such a critical asset, particularly as we move more from manufacturing to service.
MR. EVERSON: How do you avoid this becoming a situation where companies are putting out boilerplate language that doesn’t say anything meaningful for investors?
MR. GENSLER: Back to climate-risk disclosure, we’re trying to build upon an international framework. There is a group, called the Task Force on Climate-Related Financial Disclosures, that has developed some qualitative disclosures around strategy, governance and risk management.
But also quantitative disclosures. If a company says, “Here is where we’d like to be in 10 years,” or 20 years, or 30 years, what are you doing along the way? And how are you measuring your progress toward that? In the last 12 months have you had a climate event, something that hurt your sales and revenues and the like?
Tackling crypto
MR. EVERSON: Let’s turn to crypto. Do you foresee the need for regulation there?
MR. GENSLER: The crypto asset market, $2 trillion-plus in size around the globe, needs more investor protection. The public’s anticipating some profit based upon the efforts of some entrepreneur or computer-science group that’s raised money from the public. That fits in our broad remit at the SEC.
The second big challenge is the platforms. There are trading platforms where you can buy and sell these crypto tokens. But these platforms are doing a lot more than just trading, they’re also holding the crypto tokens. They’re also sometimes trading against their customer base. And they’re set up technologically differently than traditional stock exchanges.
I’ve said publicly, “Come in, work with the SEC, get registered.” They’re fundamentally exchanges, but they also have this other activity going on inside of it. It’s really important to get that investor protection.
MR. EVERSON: Have they taken you up on that offer to come in and talk to you?
MR. GENSLER: We’ve had a lot of interesting meetings in the last handful of months.
MR. EVERSON: Has what market makers said to you changed your views at all on this sector?
MR. GENSLER: As a private citizen, I was very intrigued with these innovations: artificial intelligence, as well as these crypto tokens. As a public-sector participant, I’m focused on ensuring that we achieve the main goals. Our main goals are around protecting the investing public, capital formation and the markets, protecting against fraud and manipulation.
Those goals don’t go away, whether it’s artificial intelligence, the digital analytics used on robo advisers, or brokerage apps and the like. With regard to these digital currencies, if you’re still raising money from the public, that still comes under the securities laws.
MR. EVERSON: Is this market governable? What practically can the SEC do here?
MR. GENSLER: We have a lot of tools. The challenge here is that many projects are global. They might be located offshore as well. A second challenge is that it’s a bit like the Wild West.
There have been entrepreneurs and projects started where even good-faith actors find a lawyer that finds some ambiguity, maybe because they’re incorporated in the Bahamas, Singapore, the Seychelles, Malta or wherever.
And they might say, “Well, we’re not going to offer this or that to the U.S. public,” though the public finds their way to the platform through a virtual private network or something like that. There are all too many projects trying to sidestep international standards. Not just in the U.S., they’re trying to sidestep the anti-money-laundering laws in many countries, or sidestep tax compliance in many countries. But I would note this: Few technologies in history since antiquity can persist for long periods of time outside a public-policy framework.
Legislative bodies, executive branches, regulators themselves, get involved ultimately because we work for the public. The public at some point wants a protection that’s core to their principles, even with regard to the new technology.
Like activities should have like oversight. A new technology comes along, and some adjustments are made, and there’s appropriate adjustments. The internet came along in the 1990s, and those of us at the SEC, my predecessors, had to think, “Well, what does it mean if you’re offering for sale securities on the internet?” “What does it mean if you’re trading on the internet?” Similarly, we make some adjustments here.
Read original interview on the Wall Street Journal